BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material

BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material

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BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material
BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material

BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material

During the British rule in India, Government policy towards industry and business was indifferent. The first century of British rule witnessed the decline of nearly all indigenous industries for many reasons-technological, economic and political. When India become independent in 1947, per capita income stagnated at a partly some of 40 per annum. More than three-fourths of the population was living below the poverty line. Basic infrastructural facilities required for industrialization were highly inadequate. The industrial base was low except in certain consumer industries like Jute, Cotton, Sugar, Steel, etc. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

After independence, the industrial climate was full of uncertainties regarding the likely policy of the Government of India. Therefore, investment was not forthcoming whether domestic or foreign. The workers and general public had great expectations from the government. Therefore, to clear these ideas Industrial Conference was convened in December 1947 in which great stress was laid on the growth and development of industries.


The term “Industrial Policy” refers to the government’s policy toward the industries-their establishment, functioning, growth, and management. In other words, Industrial Policy means rules, regulations, principles, policies, and procedures laid down by the government for regulating, developing, and controlling industrial undertakings in the country. It is an important document that lays a wide canvas and sets the tone for implementing promotional and regulatory roles of the government. It is equally helpful to industrialists and others in deciding the area and priorities of their investment.

After independence, the government of India formulated policies for industrial growth and development. For regulating these industrial policies, adequate measures were also adopted by way of industrial licensing policies. The industrial policy has no legal sanction and as such its violation cannot be challenged in court. But it has justification for existence.

A number of objectives have been projected by the Government of India while making industrial policy declarations from 1948 onwards. Some of the important objectives are mentioned below:

(i) Achieving a socialistic pattern of society.

(ii) Preventing undue concentration of economic power.

(iii) Achieving industrial growth.

(iv) Reducing disparities in regional development.

(v) Developing heavy and capital goods industries.

(vi) Providing an opportunity for gainful employment.

(vii) Alleviating poverty.

(viii) Achieving faster economic growth.

(ix) Protecting and developing a healthy small-scale sector.

(x) Building up a large and growing cooperative sector.

(xi) Upgrading technology and modernization of industry.

(xii) Achieving a self-sustained economy.


The first industrial policy was declared on April 6, 1948, by the Union Industry Minister Mr. Shyama Prasad Mukherjee. This policy established a base for the mixed and controlled economy in India and clearly divided the industrial sector into private and public sectors.

The following were the main features of the 1948 Industrial policy:

  1. Acceptance of the Importance of both Private and Public Sectors: The industrial policy resolution accepted the importance of both the public and private sectors in the Indian economy. It assigned a progressively active role to the state.
  2. Division of Industrial Sector: The resolution divided industries into four categories:

(i) Industries where the state had a monopoly like Arms and ammunition, atomic energy, and rail transport.

(ii) Mixed sector: In this category 6 industries were specified-coal, iron and steel, aircraft manufacture, shipbuilding, manufacture of telephone, telegraph and wireless apparatus, and mineral oil.

(iii) The field of Government Control: For these industries government regulation and direction were necessary-automobiles, heavy chemicals, heavy machinery, machine tools, fertilizer, electrical engineering, paper, cement, sugar, cotton, and woolen textiles. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

(iv) The field of Private Enterprises: All other industries (not included in the above three categories) were left up to the private enterprises/sector.

  1. Role of Small and Cottage Industries: The policy recognizes the importance of small-scale and cottage industries for employment generation and dispersal of industries. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)
  2. Participation of Foreign Capital: The role and importance of foreign capital and enterprise was recognized particularly as regards industrial Technical knowledge. However, foreign capital was expected to be a minor partner. It was also provided that Indian personnel should be trained. So that they may replace foreign technicians.
  3. Industrial Relations: The industrial policy emphasized that there should De congenial industrial relations and a work environment. It was emphasized that fair remuneration should be paid and good working conditions be created to avoid industrial disharmony.

After the declaration of the industrial policy resolution of 1948, a number of changes took place in the country. In 1951, India has been entered an organized planning era with the objective of establishing of socialistic pattern in society. In national policy, the public sector was assigned the task of rapid economic development. All these aspects facilitate the way for a new approach and the second industrial policy resolution was announced on 30th April 1956. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

The basic objectives of the policy included the followings:

(i) Speeding up the process of industrialization in India.

(ii) To develop heavy and capital goods industries.

(iii) To build up a large and growing private and cooperative sector.

(iv) Expanding an effective public sector.

(v) Preventing private monopolies.

(vi) Developing small-scale, village, and cottage industries.

(vii) Participation of workers in management to maintenance of industrial peace.

(vii) Achieving balanced economic growth.

The industrial policy resolution of 1956 provided broad guidelines and a policy framework for well-planned industrial development. In spite of considerable changes which took place from time to time, this resolution remained the Magna Carta for industrial industry till its replacement by the July 1991 industrial policy.

In the 1956 policy, industries were classified into three categories, viz. Schedule A, Schedule B, and Schedule C. Industries in the first categories listed in Schedule “A” included 17 industries:

Schedule “A”

  1. Arms and Ammunition and defense equipment.
  2. Atomic energy.
  3. Heavy casting and forging of iron and steel.
  4. Iron and steel.
  5. Heavy plants and machinery are required for iron and steel production. Mining machinery tools and other basic industries.
  6. Heavy electrical plant.
  7. Coal and lignite.
  8. Mineral oils.
  9. Mining of iron ore, chrome ore, gypsum, diamond, and sulfur.
  10. Mining and processing of copper, zinc, tin, led, wolfram and molybdenum.
  11. Minerals as per Atomic Energy Order, 1953.
  12. Aircraft.
  13. Air transport.
  14. Railway transport.
  15. Telephone and telephone cables, telegraph and wireless, Radio.
  16. Shipbuilding
  17. Generation and distribution of electricity.

Schedule “B”

The second category of 12 industries was listed in Schedule “B” as:

  1. Other minerals except minor minerals are defined in Minerals Concession Rules, 1949 Section (B).
  2. Aluminum and other non-ferrous metal not included in Schedule “A”
  3. Ferroalloy and tools steels.
  4. Machine tools.
  5. Manufacture of drugs, plastics, and other intermediate products required by chemical industries.
  6. Antibiotics and other essential drugs.
  7. Fertilizer.
  8. Synthetic rubber.
  9. Carbonization of coal.
  10. Chemical pulp.
  11. Road transport.
  12. Sea transport.

Industries placed under Schedule “A” were treated as the exclusive responsibility of the State. Schedule “B” industries were progressively state-owned. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

Schedule “C”

Industries were left for the private sector, included in the remaining where future development would generally be left to initiative and enterprise in the private sector. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

Thus, the Industrial Policy Resolution of 1956, was given a new direction and laid the foundation for industrial development in the future.


At the beginning of the 90s, India’s economic position was very unsatisfactory on all fronts whether a foreign exchange, exports, prices, the balance of payments, and fiscal deficit, which led India to a critical economic and financial situation.

On 24th July 1991, the government announced a new industrial policy. There are several fundamental departures in the new policy.

The most important initiatives are with respect to industrial licensing and registration policies, an end to the monopoly law, and a more welcoming approach to foreign investment, apart from reevaluating the role of the public sector. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

The objectives of the Industrial Policy, of 1991 included the followings:

(i) Reducing or minimizing the bureaucratic control of the industrial economy of India.

(ii) Encouragement to Indian entrepreneurship, promotion of productivity, and employment generation.

(iii) Develop indigenous technology through greater investment in R & D bringing in new technology to help Indian manufacturing units attain world standards.

(iv) Removing the regulatory system and other weaknesses.

(v) Increasing the competitiveness of industries for the benefit of the common man.

(vi) Incentives for the industrialization of the backward regions.

(vii) Enhanced support to the small-scale sector.

(viii) Streamlining the role of public sector enterprises.

(ix) Protect the interest of workers.

(x) Abolish the monopoly of any sector in any field of manufacture except on strategic or security grounds.

(xi) To link the Indian economy with the global market to make us independent.

In respect of the above objectives, the Industrial Policy, of 1991 has covered the following aspects:

  1. Industrial Licensing: In tune with the emerging trends of globalization of business, the Industrial Policy, in 1991 initiated a number of measures to liberalize the licensing system in India.

Industrial licensing was abolished for all industries except a list of 18 areas (consisting of many items) presented in Schedule “B”. Compulsory licensing is necessary for these areas for various reasons like security, strategic factors, safety aspects, environmental issues, etc. The basic aim of the policy was to liberalize the industrial sector so as to minimize bureaucratic restrictions.

  1. Foreign Investment: New Industrial Policy, of 1991 liberalized foreign investment from corporate bodies, individuals, and non-resident Indians. High priority has been given to heavy investment and advanced technology. Direct foreign investment was allowed up to 51 percent foreign equity. According to a government notification of October 28, 1991, NRIs and OCBs (No-resident Indians and Overseas Corporate Bodies) were allowed to invest up to 100 percent foreign equity in high-priority industries like tourism-related industries, oil exploration industry, and advanced diagnostic centers with full repatriation benefits. The scheme for up to 100 percent foreign investment in export-oriented industries and projects for the rival of the sick units also continued.
  2. Foreign Technology: Under this policy, adequate incentives were provided for technology imports to ensure technological competence. Indian Companies were given the freedom to negotiate the term of technology transfer with their foreign collaborators in accordance with their commercial requirements.

Foreign technology agreements in high-priority industries up to 1 crore were given automatic permission. Royalty on domestic sales was allowed at the rate of 5 percent and on exports at the rate of 8 percent, subject to a total payment of up to 8 percent of sales over a period of ten years from the date of the agreement or seven years from the commencement of production. No permission was required for hiring foreign technicians and foreign testing of indigenously developed technology. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

  1. Public Sector Policy: Industrial Policy, 1991, was offered as the priority area for the growth of the public sector in the future. The identified areas were:

(i) Essential infrastructure goods and services.

(ii) Exploration and exploitation of oil and mineral resources.

(iii) Production of defense equipment.

(iv) Technology development.

(v) Private enterprises were welcomed in such areas for providing a competitive structure.

In the connection of public sector enterprises which are loss-making units, the government realized that the time had now come to evaluate the actual contribution of the public enterprises, particularly with reference to their viability.

  1. Policy Relating to MRTP Act: As per the provision of the MRTP Act, any firm with assets over a certain size (100 crores since 1985) was classified as an MRTP firm, and such firms were allowed to start only selected industries on a case by prior approval. But the government of India realized that this Act has a bad impact on industrial growth. Thus a new policy came into consideration and more emphasis will be laid on checking unfair trade practices. Finally, the MRTP Act and the Companies Act for pre-entry restrictions on the establishment of new undertakings and expansion of the existing ones were abolished in the year 2002 and its place framed much liberal Competition Act, 2002. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)
  2. Exclusive Small Sector Policy: Industrial Policy, 1991 introduced an exclusive small sector policy (Govt. of India vide notification of April 2, 1991, and the press note of Aug. 6, 1991) to make small-industry a vibrant sector to maximize its contribution in terms of growth of output, exports and employment. For this purpose, a considerable magnitude of deregulation was visualized to minimize bureaucratic controls.

It also allows for equity participation by large industries in the small sector exceeding 24 percent of their total shareholding. The investment limit of the small industries has been raised to 1 crore so as to enable them to introduce modernization. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)


The 1991 policy statement is truly historic and liberal. followings are the main merits of the 1991 industrial policy statement:

  1. Abolition of unnecessary Industrial Licensing.
  2. Acceleration of Industrial Production.
  3. The liberalization of the rules relating to Foreign Direct Investment (FDI).
  4. Increasing performance of PSUs.
  5. Conducive environment for foreign technology agreements.
  6. Sound growth of small-sector through easy availability of resources.
  7. Increase in export through the establishment of export-oriented units.
  8. Reduction in Industrial unrest and enhancement of workers’ welfare through the participative management system.
  9. Balanced Regional Development through the establishment of industries in Backward Regions. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)


Some limitations of the 1991 policy are:

  1. There is an absence of a mechanism to determine priorities and to develop backward areas.
  2. The policy is silent about tackling the growing industrial sickness. The government has not announced a clear exit policy for sick units.
  3. Even with the scrapping of all regulations, the expected foreign investment may not come because of infrastructural deficiencies.
  4. The policy is drafted at the behest of the IMF which means the virtual surrender of the economic power of the country to a foreign agency.
  5. Off-loading of 20 percent equity in profit-making public sector units to mutual funds is a profit motive exercise like the private sector.



In India entry for starting any industry was not subject to industrial licensing till the passing of the Industrial Development and Regulation Act in 1951 (IDR Act). The IDR Act made it compulsory to get an industrial license for carrying on business, substantial expansion of existing business, diversification, and establishment of new industrial undertakings in all scheduled industries, However, small investments as specified in the Act given exemption from license and the small-scale sector was free from industrial licensing.

In the year 1969, a new Act Monopoly and Restrictive Trade Practices Act (MRTP Act) has passed and a new dimension was added to industrial licensing by the essential requirement of clearance under the MRTP Act before licensing under IDR Act. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

There was compulsory licensing of all industries except small-scale units till July 24, 1991, when industrial licensing was abolished except in the case of industries reserved exclusively for the public sector and industries requiring industrial licenses compulsorily.


A License is written permission issued by the Central Government to industrial undertakings to manufacture specified articles included in the schedule. The license further contains the details relating to the location, production capacity, the articles to be manufactured, and other relevant particulars. In India, since 1951 industrial licensing has been an important instrument of direct control designed to implement a major part of Industrial policy, through the Industries Development and Regulation Act (IDR Act), 1951.

Objectives of Industrial Licensing

The followings are the basic objectives of Industrial Licensing:

(i) Planned industrial development through appropriate regulations and control.

(ii) Balanced industrial growth and development through the establishment of units in backward regions to check regional disparities.

(iii) Directing industrial investment in accordance with plan priorities.

(iv) Ensuring Government control over industrial activities in India.

(v) Preventing concentration of industrial and economic power and monopoly.

(vi) Checking unbalanced growth of industrial establishments and ensuring the economic size of industrial units.

(vii) Encouraging healthy entrepreneurship, while discouraging unhealthy competition and restrictive industrial practices.

(viii) Promoting small-scale industries against the undue competition of large-scale industries.

(ix) Utilising the full capacity of large-scale industries.

(x) Utilising appropriate technology.

(xi) License was necessary to carry on industrial activity. It is mandatory in respect of starting new units, change in products, manufacturing a new product, and expansion of the existing units.


Industrial licensing became a part of the industrial policy with the passing of the Industries Development and Regulation Act (IDR, Act), 1951. The Act seeks to secure a planned and systematic industrial development of the country by regulating, controlling, and developing industries that are included in the first schedule of the Act. In this tune, the Government has taken control over these industries through the Central Advisory Council and Development Council.

This act came into effect on May 8, 1952, and it had three important objectives:

  1. To implement the industrial policy.
  2. To ensure regulation and development of important industries.
  3. To ensure planning and future development of new undertakings.

The Act contains 31 sections which can be broadly classified as:

  1. Preventive Provisions: Preventive provisions are included three types of provisions, viz. registration, and licensing provisions, investigation provisions, and revocation of license provisions. Owners of all existing undertakings other than the Central Government were expected to get their industrial establishments registered within a stipulated period, according to the 10th section of this Act.

Section 11 of the Act stipulated that no person or authority including a state government (other than the Central Government) shall establish a new industrial establishment without a license issued by the Central Government. while section 11A stipulates that no industrial establishment (other than those owned by the Central Government) registered under section 10 or licensed under section 11 shall produce or manufacture a new product without any license of the Central Government. According to Section 13, no industrial undertakings can make substantial expansion (any expansion exceeding 25% of existing capacity) without a license issued by the Central Government.

  1. Curative Provisions: Curative provisions include: (1) taking over the management and control of industrial enterprises and (2) control of the supply, price, and distribution of certain commodities. Section 18 of this Act empowers the Central Government to authorize any person or body of the person to take over or control any industrial undertaking if it is confirmed, after investigation, that the concerned undertaking has failed to comply with directions issued under section 16 of this Act.
  2. Creative Provisions: Creative provisions represent the Central Government’s concern for cooperation with industry, labor, and consumers. Under creative provisions, the Government formed development councils, a collection of cases, and a central advisory council for any scheduled industry representing the second schedule of the Act also laid down the functions of such councils. Thus, creative measures are:

(i) Formation of Development council

(ii) Leavy and collection cases

(iii) Central Advisory Council


The industrial licensing policy is a part of the industrial policy statement 1991. Some important features of the policy are as follows:

(i) Industrial licensing will be abolished for all projects except for a short list of industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons, and items of elitist consumption.

(ii) Areas, where security and strategic concerns predominate, will continue to be reserved for the public sector.

(iii) In projects where imported capital goods are required automatic clearance will be given.

(iv) In locations other than cities of more than 1 million population, there will be no requirement of obtaining industrial approvals from the Central Government except for industries subject to compulsory licensing. In respect of cities with a population greater than 1 million, industries other than those of a non-polluting nature such as electronics, computer software, and painting will be located outside 25 km of the periphery, except in the prior designated industrial areas.

A flexible location policy would be adopted in respect of such cities (with populations greater than 1 million) which require industrial regeneration.

(v) The system of phased manufacturing programs run on an administrative case-by-case basis will be applicable to new projects. Existing units will be provided a new broad banding facility to enable them to produce any article without additional investment. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)

(vii) The exemption from licensing will apply to all substantial expansions of existing units.

(viii) The mandatory convertibility clause will no longer be applicable for term loans from financial institutions for new projects. Finally, we can say that, after the announcement of the New Industrial Licensing Policy in 1991, the industrial scenario changed by liberal industrial licensing and ending monopoly and concentration of wealth. (BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material)


BCom 1st Year Industrial Policy and Industrial Licensing Notes Study Material

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